BERLIN The German economy is projected to grow by 0.6% in 2024 and 1.2% in 2025, after contracting slightly in 2023, according to forecasts from the Organisation for Economic Cooperation and Development (OECD) published on Wednesday.

The OECD's forecasts are less optimistic than those of the German government, which expects growth of 1.3% and 1.5% in 2024 and 2025, respectively.

A constitutional court ruling nearly two weeks ago blocked the government's plans to reallocate unused pandemic funds to green initiatives and industry support, raising fears Europe's largest economy could be further weakened.

"It is crucial to resolve the budget crisis as quickly as possible in order to give companies and households planning security and confidence in the future," OECD economist Isabell Koske told Reuters.

She said a solution should include cuts on the expenditure side, increases on the revenue side and a reform of the debt brake, which sets a limit on new borrowing.

The uncertainty created by the court ruling about funding policies to support firms and workers during the green transition could weigh on investment and private consumption, the OECD warned.

"If more fiscal tightening is needed to sustain the spending plans of extra-budgetary funds, GDP growth and inflation will be lower," the OECD said.

The German economy is expected to shrink by 0.1% this year, as high interest rates weigh on global demand for investment goods, which make up a large share of German exports, the OECD said.

The government expects the economy to contract by 0.4% in 2023.

"The German economy is certainly going through a difficult phase," Koske said.

In the coming two years, however, falling inflation and rising wages will support real incomes and private consumption, the OECD said.

Tighter monetary conditions, fading energy price pressures and fiscal tightening will help to bring down inflation from 6.2% in 2023 to 2.7% in 2024 and 2.1% in 2025, it forecast.

(Reporting by Maria Martinez and Rene Wagner; Editing by Mark Potter)